The Audit Findings for University Hospitals of Morecambe Bay NHS Foundation Trust

The Audit Findings for University Hospitals of Morecambe Bay NHS Foundation Trust. Year ended 31 March 2014 28 May 2014 Gary Devlin Engagement Lead T 0131 659 8554 E gary.j.devlin@uk.gt.com Gareth Kelly Engagement Manager T 0141 223 0891 E gareth.kelly@uk.gt.com Angela Pieri Audit team leader T 0141 223 0887 E angela.l.pieri@uk.gt.com 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

The contents of this report relate only to those matters which came to our attention during the conduct of our normal audit procedures which are designed primarily for the purpose of expressing our opinion on the financial statements. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we will report these to you. In consequence, our work cannot be relied upon to disclose defalcations or other irregularities, or to include all possible improvements in internal control that a more extensive special examination might identify. We do not accept any responsibility for any loss occasioned to any third party acting, or refraining from acting on the basis of the content of this report, as this report was not prepared for, nor intended for, any other purpose. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 2

Contents Section Page 1. Executive summary 5 2. Audit findings 8 3. Use of Resources 17 4. Fees, non audit services and independence 20 5. Communication of audit matters 22 Appendices A Action plan B Audit opinion 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 3

Section 1: Executive summary 01. Executive summary 02. Audit findings 03. Use of Resources 04. Fees, non audit services and independence 05. Communication of audit matters Management has prepared a set of high quality financial statements, which are supported by comprehensive working papers. We are still awaiting regulator assurances to support the Trust's assessment of its ability to continue as a going concern. As a direct result of the University Hospitals of Morecambe Bay NHS Foundation Trust's (the Trust) continued significant breaches in its Terms of Authorisation with Monitor, and uncertainty around the medium term recovery of the Trust's structural deficit we are unable to conclude that, the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources during 2013/14. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

Executive summary Executive summary Purpose of this report This report highlights the key issues affecting the results of University Hospitals of Morecambe Bay NHS Foundation Trust (the Trust) and the preparation of the Trust's financial statements for the year ended 31 March 2014. It is also used to report our audit findings to management and those charged with governance in accordance with the requirements of International Standard on Auditing (UK & Ireland) 260. Under the Audit Code for Foundation Trusts (the Code) we are required to report whether, in our opinion, the Trust's financial statements present a true and fair view of the financial position. In providing our opinion on the financial statements we are also required to confirm that the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources and report by exception in our audit report if we are not able to confirm this. Audit position update In the conduct of our audit we have not had to alter or change our Audit Plan, which we communicated to you on 9 April 2014. Our audit is substantially complete although we are finalising our procedures in the following areas: we are still awaiting regulator assurances to support the Trust's assessment of its ability to continue as a going concern and if it is not received we will have to issue an emphasis of matter paragraph on going concern grounds. review of the final version of the financial statements and the Foundation Trust Consolidation (FTC) schedules obtaining and reviewing the management letter of representation review of revised versions of the Annual Governance Statement and Annual Report updating our post balance sheet events review, to the date of signing the opinion. We received draft financial statements and accompanying working papers at the commencement of our work, in advance of the national deadline. The working papers provided by the Trust in support of its financial statements has been of a good standard. Key audit and financial reporting issues Financial statements opinion We have not identified any adjustments affecting the Trust's retained deficit position. We have identified a number of minor adjustments, which management have made to improve the presentation of the accounts. The key message arising from our audit of the Trust's financial statements are that management has produced a set of high quality financial statements supported by comprehensive working papers. Further details are provided in Section 2 of this report. We anticipated providing an unqualified audit opinion in respect of the financial statements. However, we intend to include an emphasis of matter paragraph in relation to going concern on the grounds that there are material uncertainties about the entity's ability to continue as a going concern. This is because the Trust has not received formal assurance from its regulators that the anticipated 13m PDC support required in 2014-15 will be made available. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 5

Executive summary Use of Resources Our review of the Trust's arrangements to secure economy, efficiency and effectiveness has highlighted the following issues, which will give rise to a qualified VFM conclusion. As a direct result of the Trust s continued significant breaches in its Terms of Authorisation with Monitor we are unable to conclude that the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources during 2013/14. The breaches are on: Condition 2 to exercise its functions 'effectively, efficiently and economically'; Condition 5 its governance duty; and Condition 6 its healthcare targets and other standards duty. Monitor was satisfied that the contraventions and failures were significant under section 52(1) of the Act There remains some uncertainty around the medium term plans to address the Trust's current structural deficit of 27m. The Trust expects to provide an updated financial strategy to its Board in June 2014, however, the successful implementation of this strategy will require the cooperation of Commissioners and other key stakeholders to be successful. A key success factor for the Trust will be to identify and secure further efficiencies in its operations by progressing the agreement and delivery of its new Clinical Strategy alongside the Better Care Together agenda. We have qualified our use of resources certificate on the breaches and on the uncertainty around recovering the structural deficit in the medium term. Further detail of our work on Use of Resources is set out in Section 3 of this report. Agreement of Balances and Whole of Government Accounts (WGA) Agreement of Balances and Whole of Government Accounts (WGA) Our audit work has not identified any variances in the NHS agreement of balances (AoB) process, which need to be reported to the National Audit Office. Controls Roles and responsibilities The Trust's management is responsible for the identification, assessment, management and monitoring of risk, and for developing, operating and monitoring the system of internal control. Our audit is not designed to test all internal controls or identify all areas of control weakness. However, where, as part of our testing, we identify any control weaknesses, we report these to the Trust. Findings Our work has not identified any control weaknesses which we wish to highlight for your attention. The way forward Matters arising from the financial statements audit and review of the Trust's arrangements for securing economy, efficiency and effectiveness in its use of resources have been discussed with the Director of Finance. We have made a small number of recommendations, which are set out in the action plan. Recommendations have been discussed and agreed with the Director of Finance and the finance team. Acknowledgement We would like to take this opportunity to record our appreciation for the assistance provided by the finance team and other staff during our audit. Grant Thornton UK LLP May 2014 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 6

Section 2: Audit findings 01. Executive summary 02. Audit findings 03. Use of Resources 04. Fees, non audit services and independence 05. Communication of audit matters We have not had to alter or change our Audit Plan as previously communicated to you on 9 April 2014. As the Trust has not been able to secure the regulator letter of assurance supporting it's going concern assessment we intend to issue an emphasis of matter qualified opinion. Our accounts audit work has not identified any significant matters or risks issues which we need to report on. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

Audit findings Audit findings against significant risks "Significant risks often relate to significant non-routine transactions and judgmental matters. Non-routine transactions are transactions that are unusual, either due to size or nature, and that therefore occur infrequently. Judgmental matters may include the development of accounting estima tes for which there is significant measurement uncertainty" (ISA 315). In this section we detail our response to the significant risks of material misstatement which we identified in the Audit Plan. As we noted in our plan, there are two presumed significant risks which are applicable to all audits under auditing standards. Risks identified in our audit plan Work completed Assurance gained and issues arising 1. Improper revenue recognition Under ISA 240 there is a presumed risk that revenue may be misstated due to the improper recognition of revenue. Reviewed and tested revenue recognition policies and carried out a walkthrough of controls Substantively tested material revenue streams Reviewed the Trust's agreement of balances process and results with Commissioners and other NHS bodies Reviewed and tested accrued income and expenditure at the year end Reviewed out-turn against budget, trends in the year and performance against Monitor's key ratios and targets. Our audit work has not identified any issues in respect of revenue recognition. 2. Management override of controls Under ISA 240 there is a presumed risk that the risk of management over-ride of controls is present in all entities. Walkthrough of controls associated with key financial systems Reviewed accounting estimates, judgements and decisions made by management Tested journal entries including a review of unusual significant transactions Agreed the financial statements and disclosures against financial data in the general ledger. Our audit work has not identified any evidence of management override of controls. In particular the findings of our review of journal controls and testing of journal entries has not identified any significant issues. We set out later in this section of the report our work and findings on key accounting estimates and judgements. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 8

Audit findings Audit findings against significant risks - continued Risks identified in our audit plan Work completed Assurance gained and issues arising 3. Going concern Wider going concern considerations and the accounting for contract arrangements with commissioning bodies may not be consistent with the terms of the contract. Reviewed integrated performance reports and financial recovery plans Documented the system for recording clinical activity and carried out an evaluation of controls to ensure activity was recorded completely and accurately Early discussions were held with the Trust on seeking robust assurance on the 2013/14 and 2014/15 financial position Reviewed and tested contract documentation and underlying transactions Reviewed the disclosures made on financial support Sought and secured third party assurances on the financial support funding Reviewed the outturn position including going concern considerations. We have carried out a comprehensive assessment of the Trust's assertion that the 2013/14 accounts have been prepared on a going concern basis. We have secured evidence from local commissioners to back up the 6m of additional financial support for 2014/15. The Trust requested but has not been able to secure an assurance letter from Monitor, which outlines the underlying Department of Health's commitment to work with the Trust on its financial recovery in 2014/15, specifically around the PDC of 13m required. Following national moderation of our assessment, we are unable to conclude that the Trust continues as a going concern. In addition, the medium term financial health of the Trust is still to be fully secured. See the Use of resources Section 3 for more detail. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 9

Audit findings Audit findings against other risks In this section we detail our response to the other risks of material misstatement, which we identified in the Audit Plan. Transaction cycle Description of risk Work completed Assurance gained & issues arising Healthcare revenues Accounting for contract arrangements with commissioning bodies not consistent with terms Walkthrough of healthcare revenue controls to gain an understanding of the Trust's processes and tested that they are designed effectively Substantively tested income and receivables from commissioning bodies to contract information including contract adjustments Our audit work has not identified any significant issues in relation to the risk identified. Reviewed the intra-nhs agreement of balances process. Employee remuneration Employee remuneration accruals understated Walkthrough of payroll controls to gain an understanding of the Trust's processes and tested that they are designed effectively Our audit work has not identified any significant issues in relation to the risk identified. Tested the effectiveness of controls within the employee remuneration system, which reduced the amount of substantive testing carried out at the year-end High level analytical review of employee remuneration Substantively tested year end payroll accruals Tested completeness of the payroll feeder system to the ledger Cut off testing. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 10

Audit findings Audit findings against other risks - continued In this section we continue to detail our response to the other risks of material misstatement which we identified in the Audit Plan. Transaction cycle Description of risk Work completed Assurance gained & issues arising Trade creditors / accruals Creditors understated or not recorded in the correct period Walkthrough of operating expenditure controls Tested the effectiveness of controls within the operating expenses system, which reduced the amount of substantive testing carried out at the year-end Our audit work has not identified any significant issues in relation to the risk identified. Substantively tested accruals and payables Reviewed judgements associated with accruals Cut off testing Creditor control account reconciliation. Property, plant and equipment (PPE) Revaluation measurements not correct Walkthrough of the revaluation process Substantively reviewed the valuation judgements and accounting treatment adopted Tested revaluation adjustments. Our audit work has not identified any significant issues in relation to the risk identified One improvement management has made is to the PPE disclosure Note 10 to be explicit on which indices have been used and to demonstrate that they are well recognised and relevant The Trust has applied indices to generate the upward revaluation of 6.8m as at 31 March 2014. In light of this and the revised Clinical and Better Care Together strategies the Trust should consider a full revaluation in 2014/15. This is particularly important as the assumptions used to derive the alternative site valuations, on which 68% of the Trust's asset base has been valued, will need to be reassessed as these strategies are finalised. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 11

Audit findings Accounting policies, Estimates & Judgements In this section we report on our consideration of accounting policies, in particular revenue recognition policies, and key e stimates and judgements made and included with the Trust's financial statements. Accounting area Summary of policy Comments Assessment Revenue recognition Revenue derived from the provision of patient care activities is recognised when, and to the extent, that services have been provided to Commissioners. Where treatment is part-completed at the Balance Sheet date, the Trust apportions revenue across financial periods. All other revenue is recognised at the point goods and/or services have been supplied Estimate and judgements Key estimates and judgements include : Asset valuation basis including alternative site valuations Asset Revaluations Provisions Partially completed spells Actuarial assumptions for NHS Pension scheme related costs. The Trust has adequately disclosed its revenue recognition policies in the financial statements The policy is consistent with the principles of IAS 18 and the principles set out in Monitor's FT Annual Reporting Manual. Our review of the material judgements and estimates made by management found that all judgements and estimates made were reasonable and had been appropriately disclosed in the financial statements in accordance with accounting standards and Monitor's FT Annual Reporting Manual. Assessment Marginal accounting policy which could potentially attract attention from regulators Accounting policy appropriate but scope for improved disclosure Accounting policy appropriate and disclosures sufficient 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 12

Audit findings Misclassifications & disclosure changes The table below provides details of one disclosure change identified during the audit which has been made in the final set of financial statements. Adjustment type Value '000 Account balance Impact on the financial statements 1 Disclosure 1,157 Financial Instruments Financial liabilities Agency staff who have worked additional sessions or on waiting list initiatives, but had not been paid for at year end, have been omitted in error from the financial liabilities figures disclosed under Financial Instruments Note 21.4. As these are contracted staff they fall under the definition of financial instruments. The total financial instrument - financial liabilities figure, as at 31 March 2014, of 10,360,000 is understated by 1,157,000 and has therefore been amended by management to 11,517,000. The prior year comparator figure for similar items was also omitted in error, which amounted to 1,536,000 in 2012/13. Management have not amended this comparator as it is not a material figure nor is it reported in a primary statement. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 13

Audit findings Internal controls The purpose of an audit is to express an opinion on the financial statements. Our audit included consideration of internal control relevant to the preparation of the financial statements in order to desi gn audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal control. We have no mattes that we wish to report. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 14

Audit findings Other communication requirements We set out below details of other matters which we, as auditors, are required by auditing standards to communicate to those c harged with governance. Issue Commentary 1. Written representations A standard letter of representation has been requested from the Trust, with specific representation requested from management in respect of the assumptions used to support the accounts being prepared on a going concern basis in line with IAS1. 2. Disclosures Our audit work identified no material omissions in the financial statements. 3. Matters in relation to fraud We have previously discussed the risk of fraud with the Audit Committee and have not been made aware of any issues which affect our audit. We have not been made aware of any other incidents in the period and no other issues have been identified during the course of our audit procedures. 4. Matters in relation to laws and regulations 5. Matters in relation to related parties We are not aware of any significant incidences of non-compliance with relevant laws and regulations. We are not aware of any related party transactions which have not been disclosed. 6. Going Concern As outlined under significant risks we have considered managements assessment of going concern. Our work has identified significant issues in relation to going concern and the Trust is unable to secure adequate assurances from its regulators, including up to the end of May 2015. The local commissioners have provided letters and other evidence on the financial support being made available to the Trust for 2014/15. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 15

Section 3: Use of Resources 01. Executive summary 02. Audit findings 03. Use of Resources 04. Fees, non audit services and independence We are unable to confirm that in all significant respects the Trust put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2014. 05. Communication of audit matters 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

Use of Resources Use of Resources In providing our opinion on the financial statements we are required by the Code to satisfy ourselves whether the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources and report by exception in our audit report if we not able to satisfy ourselves. To support our work on Use of Resources we have reviewed: the Trust's Annual Governance Statement (AGS) for consistency with our knowledge of the Trust the Trust's annual report to ensure consistency with our knowledge and understanding of the Trust and that there are no apparent misstatements of fact or material inconsistencies with other key documents the work of other regulatory bodies for impact on our responsibilities the Trust's financial recovery plans. Key findings Annual Governance Statement We have reviewed the statement made by the Chief Executive as part of the Annual Governance Statement (AGS) and have satisfied ourselves that the post-audit version: complies with the requirements of the Annual Reporting Manual; and is consistent with other information that we are aware of from our audit of the financial statements, including regulators reports and breaches, board reports, the Quality Account and the Annual Report. We acknowledge, the Trust has made a significant improvement in the production of its AGS, in terms of initial compliance with Monitor's Annual Reporting Manual disclosure requirements, and the wider supporting assurance gathering arrangements on areas such as the Quality Governance Framework. A summary of the suggested changes which management have made to the final AGS include: Section 4.7 - clarity on the ways the Trust is able to assure itself of the validity of its Corporate Governance Statement Section 4.7 - being explicit on the degree and rigour of oversight the Board has over the Trust's performance and the submission of timely and accurate information to assess risks to compliance with its licence Section 8 - some rewording to add caveat to no significant control weaknesses against the control related risks areas covered in the previous Section 7. Annual Report The initial drafts of the Annual Report presented for audit contained a number of key omissions, including a section detailing: performance evaluation of the board, its committees directors and chair, together with evidence of whether external evaluation of the board has been carried out external audit non audit service work on the Governance Action Plan was carried out while maintaining auditor objectivity and independence periodic performance assessment of the Council of Governors by the led chairperson fuller descriptions on some comply or explain disclosures to ensure compliance with the new NHS FT Code of Governance. We acknowledge these have been corrected in the final draft of the Annual 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 17

Use of Resources Breaches in Monitor's terms of authorisation Monitor continue to regard the Trust as being in significant breach of its terms of authorisation. Consequently, we are unable to conclude that the Trust has made proper arrangements for securing economy, efficiency and effectiveness in your use of resources throughout 2013/14. We have therefore qualified our certificate. Financial Recovery Use of Resources conclusion On the basis of our work, we are not satisfied that in all significant respects the Trust put in place proper arrangements to secure economy, efficiency and effectiveness in its use of resources for the year ending 31 March 2014. Quality Report We have completed the work required by Monitor in respect of the Trust's Quality Report. We will provide a separate report on the outcome of our work on the Quality Report. There are no significant issues which we wish to highlight for your attention. The Trust's Financial Risk Rating was reduced to 1 in August 2012, as a consequence of the deterioration in the Trust's projected financial position. The Trust has reported a deficit of 23.2 million in 2012/13 and a deficit of 18.8 million in 2013/14. The current Continuity of Service Rating remains at 1 the highest possible risk category. The Trust is currently developing a medium term financial strategy to address the structural deficit of 27m. We acknowledge the Trust has largely delivered on its planned 14million Cost Improvement Programme in 2013/14, as part of its medium term recovery plan. However, there is a need to further strengthen the Trust's Clinical and Better Care Together Strategies, to identify and secure the required value for money to deliver on its medium term aim of returning to financial balance. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 18

Section 4: Fees, non audit services and independence 01. Executive summary 02. Audit findings The expected audit fees for 2013/14 are in line with the planned fees. 03. Use of Resources 04. Fees, non audit services and independence 05. Communication of audit matters 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

Fees, non audit services and independence Fees, non audit services and independence We confirm below our final fees charged for the audit and provision of non-audit services. Fees Per Audit plan Actual fees Trust audit 47,000 47,000 Quality Accounts 6,000 6,000 Charity audit 6,000 6,000 Total audit fees 59,000 59,000 Fees for other services Service Fees Review of the PwC Governance Action Plan as requested by Monitor Reported in January 2014 Independence and ethics 16,500 Ethical standards and International Standards on Auditing (ISA) 260 require us to give you full and fair disclosure of matters relating to our independence. In this context, we disclose the following to you: Your Engagement Manager Gareth Kelly is married to Sharon Kelly who is the Head of Contracting for Cumbria Clinical Commissioning Group and she negotiates on the University Hospitals of Morecambe Bay NHS Foundation Trust contract. This has been communicated to the Office Manager Partner and the Director of Audit Quality and Compliance for Grant Thornton. This is not deemed to be a significant independence risk and is mitigated through the Manager not auditing or reviewing income relating to the CCG contracts. This is managed through the In Charge Auditor auditing the related income and reviews will be carried out by the Engagement Lead. We confirm that we have implemented policies and procedures to meet the requirements of the Auditing Practices Board's Ethical Standards. Therefore we confirm that we are independent and are able to express an objective opinion on the financial statements. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 20

Section 5: Communication of audit matters 01. Executive summary 02. Audit findings We clearly set out the audit matters in this report to the Audit Committee and define our respective responsibilities. 03. Use of Resources 04. Fees, non audit services and independence 05. Communication of audit matters 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014

Communication of audit matters Communication of audit matters to those charged with governance International Standards on Auditing (ISA) 260, as well as other ISAs, prescribe matters which we are required to communicate with those charged with governance, and which we set out in the table opposite. The Audit Plan outlined our audit strategy and plan to deliver the audit, while this Audit Findings report presents the key issues and other matters arising from the audit, together with an explanation as to how these have been resolved. Our communication plan Respective responsibilities of auditor and management/those charged with governance Overview of the planned scope and timing of the audit. Form, timing and expected general content of communications Audit Plan Audit Findings Respective responsibilities As auditor we are responsible for performing the audit in accordance with ISAs (UK and Ireland), which is directed towards forming and expressing an opinion on the financial statements that have been prepared by management with the oversight of those charged with governance. We are required to audit the financial statements and to give an opinion as to: whether they give a true and fair view of the financial position of the Trust and its expenditure and income for the period in question whether they have been prepared properly in accordance with relevant legislation, applicable accounting standards and other reporting requirements whether the Trust complies with the Monitor Foundation Trusts Financial Reporting Manual which requires directors of an NHS Foundation Trust to produce a directors' report akin to that required by paragraph 234 of the Companies Act 1985. We are required to follow Section B of ISA 720 in relation to the directors' report whether the Annual Governance Statement (AGS) has been presented in accordance with relevant requirements and to report if it does not meet these requirements, or if the statement is misleading or inconsistent with our knowledge whether appropriate arrangements are in place for the preparation of the Quality report whether the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources and report by exception in our audit report if we are not able to satisfy ourselves. The audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Views about the qualitative aspects of the entity's accounting and financial reporting practices, significant matters and issues arising during the audit and written representations that have been sought Confirmation of independence and objectivity A statement that we have complied with relevant ethical requirements regarding independence, relationships and other matters which might be thought to bear on independence. Details of non-audit work performed by Grant Thornton UK LLP and network firms, together with fees charged Details of safeguards applied to threats to independence Material weaknesses in internal control identified during the audit Identification or suspicion of fraud involving management and/or others which results in material misstatement of the financial statements Compliance with laws and regulations Expected unqualified with an emphasis of matter auditor's report Uncorrected misstatements Significant matters arising in connection with related parties Significant matters in relation to going concern 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 22

Appendices Appendices 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 23

Appendices Appendix A: Action plan Priority High Potential Significant deficiency risk of significant misstatement Medium Potential Deficiency - risk of inconsequential misstatement Rec No. Recommendation Priority Management response Implementation date & responsibility 1 Assess the need for a full asset revaluation in 2014/15, based on the indices movement since the last revaluation and the impact of the Clinical and Better Care Together strategies on the alternative site valuation key assumptions. High The Trust will engage with a suitably qualified valuer to assess the potential impact of changes in clinical strategy, on the values of the Trust s assets.. By 31 December 2014 A Cummins Deputy Chief Executive/Director of Finance and Information. 2 Ensure robust stakeholder engagement continues to enable the Clinical Strategy and Better Care Together agenda to effectively assist with the Trust's medium term financial recovery. High The Trust continues to be fully engaged with commissioners and stakeholders as part of the Better Care Together initiative. Ongoing A Cummins Deputy Chief Executive/Director of Finance and Information 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 24

Appendices Appendix B: Audit Report We have had to issue the Trust with an unqualified opinion, with an emphasis of matter paragraph on going concern, and a modified use of resources audit report. Independent auditor's report to the Council of Governors and Board of Directors of University Hospitals of Morecambe Bay NHS Foundation Trust We have audited the financial statements of University Hospitals of Morecambe Bay NHS Foundation Trust ('the Trust') for the year ended 31 March 2014 which comprise the statement of comprehensive income, the statement of financial position, the statement of cash flow, the statement of changes in taxpayers' equity and the related notes. The financial reporting framework that has been applied in their preparation is the NHS Foundation Trust Annual Reporting Manual issued by Monitor, the Independent Regulator of NHS Foundation Trusts. We have also audited the information in the Remuneration Report that is subject to audit, being: the table of salaries and allowances of senior managers and related narrative notes the table of pension benefits of senior managers and related narrative notes the table of pay multiples and related narrative notes. This report is made solely to the Council of Governors and Board of Directors of the Trust, as a body, in accordance with paragraph 24(5) of Schedule 7 of the National Health Service Act 2006. Our audit work has been undertaken so that we might state to the Trust's Governors and Directors those matters we are required to state to them in an auditor s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Trust, the Trust's Governors as a body and the Trust's Board of Directors as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Accounting Officer and auditor As explained more fully in the Chief Executive's Statement, the Chief Executive as Accounting Officer is responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. The Accounting Officer is responsible for the maintenance and integrity of the corporate and financial information on the Trust's website. Legislation in the United Kingdom governing the preparation and dissemination of the financial statements and other information included in annual reports may differ from legislation in other jurisdictions. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law, the Audit Code for NHS Foundation Trusts issued by Monitor, and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board s (APB s) Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Trust s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Trust; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially inconsistent with the knowledge acquired by us in the course of performing the audit. If we become aware of any 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 25

Appendices Appendix B: Audit Report We have had to issue the Trust with an unqualified opinion, with an emphasis of matter paragraph on going concern, and a modi fied use of resources audit report. Opinion on the financial statements In our opinion the financial statements: give a true and fair view of the state of the financial position of the Trust as at 31 March 2014 and of its income and expenditure for the year then ended; and have been properly prepared in accordance with the NHS Foundation Trust Annual Reporting Manual and the directions under paragraph 25(2) of Schedule 7 of the National Health Service Act 2006. Emphasis of matter - Going concern In forming our opinion on the financial statements, which is not qualified, we have considered the adequacy of the disclosure made in note 1.1 to the financial statements concerning the Trust's ability to continue as a going concern. The Trust incurred a deficit of 18.8 million during the year ended 31 March 2014 and, at that date, the Directors' were seeking additional support for 2014/15 of 13 million through receipt of Public Dividend Capital (PDC). As no assurances are available from the Trust's regulators to confirm that PDC support will be made available, this indicates the existence of a material uncertainty which may cast doubt on the Trust's ability to continue as a going concern. The financial statements do not include the adjustments that would result if the Trust was unable to continue as a going concern. Opinion on other matters prescribed by the Audit Code for NHS Foundation Trusts In our opinion: the part of the Remuneration Report subject to audit has been properly prepared in accordance with paragraph 25 of Schedule 7 of the National Health Service Act 2006 and the NHS Foundation Trust Annual Reporting Manual 2013-14 issued by Monitor the information given in the annual report for the financial year for which the financial statements are prepared is consistent with the financial statements. 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 Matters on which we are required to report by exception Under Section 62(1) of the National Health Service Act 2006 and Monitor s Audit Code for NHS Foundation Trusts, we have a duty to satisfy ourselves that the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources. The Audit Code requires us to report if we are not satisfied that the Trust has made proper arrangements. On 11 October 2011 and 6 February 2012 Monitor issued notices of exercise of intervention of powers under section 52 of the National Health Service Act 2006 (the Act) to the Board of Directors and the Council of Governors of the Trust. These notices stated that Monitor was satisfied that the Trust had contravened and was failing to comply with the following conditions of its Terms of Authorisation: Condition 2 to exercise its functions 'effectively, efficiently and economically'; Condition 5 its governance duty; and Condition 6 its healthcare targets and other standards duty. Monitor was satisfied that the contraventions and failures were significant under section 52(1) of the Act. Additionally, the Trust's Financial Risk Rating was reduced to 1 in August 2012, as a consequence of the deterioration in the Trust's projected financial position. The Trust has reported a deficit of 23.2 million in 2012/13 and a deficit of 18.8 million in 2013/14. The current Continuity of Service Rating remains at 1, the highest possible risk category. The Trust is currently developing a medium term financial strategy to address the structural deficit as part of its medium term recovery plan. However, there is a need to further strengthen the Trust's Clinical and Better Care Together Strategies to ensure that it can deliver on its medium term aim of returning to 26 financial balance.

Appendices Appendix B: Audit Report We have had to issue the Trust with an unqualified opinion, with an emphasis of matter paragraph on going concern, and a modi fied use of resources audit report. As a result of the matters above, we have been unable to satisfy ourselves that the Trust made proper arrangements for securing economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. We have nothing to report in respect of the following matters where the Audit Code for NHS Foundation Trusts requires us to report to you if, in our opinion: the Annual Governance Statement does not meet the disclosure requirements set out in the NHS Foundation Trust Annual Reporting Manual or is misleading or inconsistent with information of which we are aware from our audit the Trust's Quality Report has not been prepared in line with the requirements set out in the NHS Foundation Trust Annual Reporting Manual or is inconsistent with other sources of evidence. Qualified Certificate We certify that we have completed the audit of the financial statements of the Trust in accordance with the requirements of Chapter 5 of Part 2 of the National Health Service Act 2006 and the Audit Code for NHS Foundation Trusts issued by Monitor. As set out above, we have been unable to satisfy ourselves that the Trust has made proper arrangements for securing economy, efficiency and effectiveness in its use of resources for the year ended 31 March 2014. Gary Devlin Director for and on behalf of Grant Thornton UK LLP 7 Exchange Crescent Conference Square Edinburgh EH3 8AN 29 May 2014 2014 Grant Thornton UK LLP University Hospitals of Morecambe Bay NHS FT Report on the 2013-14 audit May 2014 27

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